Cracks in the System

Charles Ellis wrote an article in the Financial Analysts Journal called,  “Our #1 Challenge: Retirement Insecurity”. The retirement crisis isn’t creeping up on us, it’s here. Americans do not have enough money saved for retirement, and they can’t all work until they die. Social Security does not cover the basics. Pensions are gone, and less than half of American workers have access to a retirement plan at work. Those who have retirement plans don’t save enough. Like a fault line, these cracks in the system are building pressure for a massive quake.

Ellis proposes good ideas –  make automatic enrollment mandatory for 401(k) plans, start employee contributions at a rate that maxes the employer match, automatically increase employee contributions each year, educate workers on the impact of early withdrawals and early retirement. He points out the difference in Social Security when claiming at age 62 versus 70 is a whopping 76%. These ideas are great for younger workers and those who have access to a 401(k).

What about the 52% of workers who do not have a 401(k) or other retirement plan?

One idea circulated and supported by my colleagues Bill Sweet and Ben Carlson, is that all American workers should have access to the Federal Thrift Savings Plan. This is the retirement plan for U.S. federal government employees. The fees are low, and the investment options are simple. The pushback will come from banks, broker-dealers, asset managers, and insurance companies that this is a federal government takeover of your retirement plan. But that is not the case. It will provide access to 42 million workers who have no retirement plan, not takeover your existing plan.

Retirement plans are too expensive for small employers. Access to the Federal TSP  is a solution that immediately provides access to millions of workers. We must find a way to make it easier to save. The FDIC found that 6.5% (8.4 million) of American households have no banking relationship at all and another 18.7% (24.2 million) are underbanked. These people are not going to open and fund IRAs. Several states, including Oregon, California, and Illinois, have created state run retirement plans for small employers. The key here is to make employer participation mandatory and allow employees to opt-out if desired. It sounds Big Brother-ish, but individual business adoption will take too long and many will never join.

Multiple employer plans (MEPs) are another solution that allow businesses to share in the administrative costs retirement plans. Under the current rules, businesses must have a high degree of commonality to pool their plans together. There is also a “one bad apple” provision that disqualifies an MEP if one employer runs afoul of ERISA regulations. There is progress on MEPs. President Trump signed an Executive Order on August 31 calling for an expansion of the rules.

Other counties have taken more dramatic action. Australia has a mandatory savings plan, and employers must contribute 9.5% of employee earnings each year. Employees have their own account and can choose the investments, but they cannot take loans or withdrawals until age 55, and then, only if retired. This is a plan that sits on top of Australia’s equivalent to Social Security. The Netherlands has industry-wide retirement plans; such as retail or construction, which can be mandated by the government. One can envision something similar for American employees in restaurants, gas stations, and hair salons.

The retirement crisis is real, and it’s here. I have seen it. A couple in their early 60’s forced to take early retirement when health problems made work impossible. Their total retirement savings less than $200,000. Employees working well in to their 70s for fear of running out of money. An 82 year-old taking part-time work to maintain his standard of living. A laid-off worker depleting his IRA from $300,000 to $0 when he couldn’t find a comparable job. These are the lucky ones, the ones who scraped their pennies together and found a way to survive.

Social Security was created in response to a crisis of poverty among older Americans. If we wait too long, we will be facing a similar crisis. The price of waiting is high. These cracks in the system are not strong enough to hold forever.



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